UNDERSTANDING ETHICAL SCANDALS 

Recent emissions scandal at VW highlights the problem with most efforts to prevent ethical breakdowns. They miss the point. They focus on treating symptoms by proposing legalistic rules and controls, rather than dealing with the root causes of what drives unethical behaviour in performance-driven companies: Poor leadership, legalistic guidance, a kiss-up/kick-down climate and wrong incentive schemes – pushing employees to do whatever it takes to make the numbers in order to get a seductive bonus, make career, please the boss or simply keep a job.

It is tempting to blame individuals with flawed characters for these ethical breakdowns. Wells Fargo CEO blamed rank and file employees for rampant fake bank account scandal, while former VW CEO accused a few engineers for its widespread emission scandal. However, such a traditional view fails to reflect that even people of good character will do what they know is wrong, if the context does not specifically encourage, or even discourages ethical decision-making. A study by Harvard Business School Professor Gino demonstrated how sales people - incentivised by monthly clothes sales - would invite friends to buy clothes at the end of the month just to meet targets, only to return them weeks after. Similarly, Wells Fargo employees were under such pressure to deliver results that they created heaps of sham accounts or signed up family members, while VW had stiff performance targets for diesel car sales in the US.

Unethical practices can destroy in a matter of days the reputation that has taken years even centuries for a business to build. Case in point is the latest scandal rocking VW - a globally recognized brand. “We do not engage in false, deceptive or misleading representation or conduct” reads a simple principle from the PolicyApp - the flagship PolicyStore solution - with an embedded Moral Compass to reflect on critical dimensions. Could the PolicyApp have nudged key employees and saved VW from a scandal that has rocked one of the most respected names in business?

The benefits of providing employees with ethical policies go far beyond legal safeguard. Behavioural economics research has shown that reminding people of ethical standards at the moment of decision-making leads to far more ethical behaviour. Students don't cheat when given moral reminders and people report more honestly on insurance claims when ‘nudged’ to sign before, rather than after completion.  

HOW CAN LEADERS PREVENT UNETHICAL BREAKDOWNS IN TODAY'S TRANSPARENT BUSINESS CLIMATE?

First, leaders have to improve judgments by offering employees simple and user-friendly ethical guidance and make it available to people at the critical moment when it matters most; when they take decisions. Then leaders need to develop employees' skills to view business through commercial and ethical lenses simultaneously. 

Finally, leaders need to create conditions that enable employees to act on those nudges through leading by example, inviting challenge and rewarding responsible conduct. But why reward something that is simply expected? Well, organisations already reward what is expected; leaders are rewarded for leading, researchers for researching and sales people for selling. In the end, an organisation rewards what it believes is important. Therefore, if it strives to conduct business responsibly, it must equip people to act responsibly and then reward it.


Dan Ostergaard is founder and CEO of PolicyStore. He was also founder of Integrity by Design, a boutique consultancy with dozens of Fortune 500 clients. Previously, he had worldwide responsibility for managing integrity as part of the Corporate Executive Group at Novartis. He was also the Chairman of the Board of a leading European-wide association of integrity management professionals, ENICO. Dan has been featured in several publications including Financial Times, CEO Magazine and Journal for Sustainable Banking and has won national championships as a basketball player.